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8 December 20223 minute read

Country-specific updates: Japan

Special JCT relief measures proposed for small businesses

In Japan, the "invoice system" is scheduled to be introduced in October 2023 to ensure that the rates and amounts of the Japanese Consumption Tax ("JCT" - equivalent to EU VAT) are accurately stated and stored on invoices. Under the invoice system, in principle, buyers will be able to credit the paid JCT amount (i.e. input tax credit) only if the JCT invoice is retained. As the issuing of JCT invoices is limited to JCT taxpayers registered under the invoice system ("Registered Invoice Issuer" - equivalent to the VATIN system in the EU), businesses are required by their customers to demonstrate that they are so registered .

The current Consumption Tax Act allows small businesses with taxable sales of JPY 10 million or less to be exempt from paying the consumption tax (so-called "JCT-exempt businesses") unless they elect to become JCT taxpayers. However, only the JCT taxpayers can be registered for the invoice system; thus, in order for such JCT-exempt businesses to issue JCT invoices, they will need to elect to become JCT Taxpayers, which would effectively increase their JCT liabilities. For this reason, many JCT-exempt businesses have been opposed to the invoice system and have not registered as Registered Invoice Issuers.

As a new measure to reduce the JCT burden for small businesses upon implementation of the invoice system, the Government has therefore started to consider introducing a transitional measure to limit the amount of the small businesses' JCT liabilities to 20% of the consumption tax they received upon the JCT taxable sales. This is as a special exception to the simplified JCT taxation regime, where JCT taxpayers can credit the deemed input JCT amount regardless of the actual input JCT paid to their suppliers. At present, this is anticipated to be a three-year measure starting in October 2023, according to which, for example, a business with taxable sales of JPY 5 million would pay the JCT of JPY 100,000, which is 20% of the collected JCT amount (JPY 500,000) assuming all the products sold by the operator are subject to the standard JCT rate (10%).

In addition to this, to prevent non-Registered Invoice Issuers from being terminated or excluded by their clients, another temporary measure is being considered, whereby a small transaction is eligible for the input tax credit without the JCT invoice. The threshold of the "small transaction" to be covered by this system is still being discussed among government officials and the ruling party lawmakers; however, the details are expected to be released in the ruling party's 2023 tax reform proposal, which will be announced in mid-December.

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